One of the most used methods of people to invest in mutual funds is a Systematic Investment Plan (SIP). It enables the investors to make a fixed sum in cycles into a selected mutual plan. SIPs allow an investor to educate and become a disciplined investor, they help the investor to avoid the effects of market volatility by rupee cost averaging and the ability to compound over the long-run. Goals that can be invested in SIPs to have long term wealth creation include retirement, children education or home purchase.
Effects of Cessation of SIP on Long-term Objectives
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SIPs take advantage of the compounding effect, such that returns compound with time. Pausing halfway breaks this chain, and leaves you with less corpus that you might have.
- Goal Misalignment
Financial goals are normally estimated in terms of anticipated contributions and returns, often calculated using an SIP calculator. Stopping SIPs implies you will not meet the target sum hence you will either have to make additional contribution in the future or continue timelines.
- Market Timing Risks
SIPs assist in smoothing out the stock market fluctuations. As soon as you do not make a purchase, you lose this benefit, and you may find yourself making lump sums at the wrong time in future.
- Psychological Impact
The habit of disciplined investing can become most frustrating to break and thus, it becomes difficult to continue with it and keep going.
Issues to be Considered Before Discontinuation of a SIP
Before you resolve to discontinue your SIP, you must consider the following factors:
- Financial Emergency/ Temporary Liquidity Crunch
Pausing, rather than halting, is advisable when faced with a short-term cash flow problem.
- Goal Priority
Evaluate the relevance of the goal connected with the SIP. In case yes, it might not be prudent to discontinue.
- Performance of the Fund
In case the fund is not performing well, it may appear rational to halt SIPs. But initially, examine whether the poor performance is as a result of the short-term market situation or structural problems.
- Alternative Options
Is it possible to decrease the SIP size rather than cease it? A lesser contribution is enough to keep the compounding engine going.
- Implications of Tax and Exit Loads
Stagnation of SIPs does not imply the redemption of units at once. Enquire whether there are exit loads or tax obligations before making any movement.
Most of the Errors that Investors Make When Terminating SIPs
Market volatility occurs when share prices are affected by the market environment, which can lead to the emergence of new market opportunities. Market volatility is a response to the market environment where share prices are influenced in ways that result in new market opportunities.
In the times of recession, many investors withdraw SIPs due to fear of losses. Paradoxically, it is at these moments that the best time to invest more is since the units are cheaper.
- Ignoring Goal Mapping
Termination of SIPs without re-evaluating the effect of that on financial targets may result in extreme shortfalls in future.
- Redemption of Investments Immediately
The process of termination of SIPs does not entail the redemption of current investments. This early doing so may entrap losses.
- Failure to Explore Pause or Adjustment
In lieu of halting, the investors might decrease the quantity or temporarily halt. These are the main options that are overlooked.
- Following Herd Mentality
When the basis of decision-making is peer influence as opposed to individual financial planning, the outcome of such decisions is, most of the time, poor.
Conclusion
SIPs are made to enable you to get long term objectives with the help of disciplined investing. Even though life circumstances or financial crisis might be lure you to quit, it is important to realize the consequences in the long run.
FAQs
Is it possible to resume my SIP, having interrupted?
You can always restart, though you would have to make a new mandate with your fund house.
Is a pause in SIP superior to stopping?
Taking a few months off continues to increase your previous investments (assuming that your fund and the market perform well but does not interrupt).
What will become of my current investments in case I quit SIP?
As long as you do not redeem it, the amount that you invest in the fund will continue to earn returns.
Is it best to stop SIPs when the market is in a crash?
You may only interrupt your SIP in case of a goal that was approaching completion or when you have a cash flow crunch.
What makes me understand that my fund is performing poorly?
Compare the fund performance of rolling returns to peer funds and benchmark indices over at least 3-5-10 years and then make a decision.
Investments in Mutual Funds are subject to the market risks, ensure that all the documents concerning the scheme are read. This is including an investment education and awareness program by the PGIM India Mutual Fund. The entire Mutual Fund investors shall undergo one- time KYC (Know Your Customers) process. The Registered Mutual Funds (RMF) should be the only ones to be dealt with.